U.S. stocks bounced between gain and loss on several occasions yesterday, but an afternoon rally held and the market booked its first back-to-back gains since the third week of April when the S&P 500 hit its 19-month high. 

Stocks ran into a wall of weakness late in the morning session following the latest data on the service-sector.  That figure posted a nice headline reading, but the report’s inventory sentiment figure suggested that the rebuilding of stockpiles has gotten ahead of consumer demand.  The market clearly noticed this aspect of the report and sold off. 

The afternoon rally was probably about traders getting in front of what is likely to be the best headline monthly jobs gain since 1983 – although when 1.1 million payrolls were added in September of 1983 it didn’t need census hiring to boost the figure and the ensuing 18 months enjoyed job gains of 304K/month.  Man, we need that degree of jobs growth bad right now but those comparing 2010 to 1983 are “flying high and feeling mean,” as Charlie Daniels would say. 

The official market expectation is for an increase of 180K in private-sector payrolls and about 355K via census hiring – for a total of 535K.  As mentioned yesterday, I suspect we’ll need 200K-plus in private sector job creation to get the market excited, especially since the Obama Administration has been hyping the number lately.  As a result, the whisper number is for a reading of 750K jobs, and that’s why we’ll need 200K-plus from the private sector to goose stock prices.

In currency news, the euro got slammed back down yesterday, hitting 1.2162 for the lowest level in four years, on speculation the Swiss National Bank will not be able to keep intervening in propping up the currency.  My call is we’ll see 1.15 EUR/USD, not in a straight shot but over several months, and that’s when we’ll see coordinated central bank interventions to stem the assault.

Market Activity for June 3, 2010

ADP Employment

The preliminary jobs report from Automatic Data Processing (ADP) reported that private payrolls rose 55,000 in May, the April figure was revised up to show a 65,000 payroll increase – that was twice the previously-believed increase, which ADP had at just 32,000 last month.

The only reason one pays attention to this preliminary report from ADP is to gauge what will occur via the official BLS (Bureau of Labor Statistics) data, but it hasn’t even been close lately as the government reported 231,000 private payrolls were added in April.  One of these figures is way off.  ADP does have the jobless claims corroborating its results, but one kind of has to go off of the official government statistics. 

This latest increase marks the fourth month of payroll increase, which is the same for the BLS data – so at least ADP has the direction right – but it’s a paltry monthly average increase of 39,000.

ADP had service-providing employment up 78,000 in May, the fifth-straight monthly increase.  Employment in the goods-producing industries down 23,000 as construction payrolls declined 41,000, the 35^th month of decline and off by 2.191 million from the peak hit in January 2007.  Manufacturing payrolls rose 15,000, the fifth month of increase, according to ADP.

Large firms (> 500 employees) added 3,000 jobs; medium-sized firms increased payrolls by 39,000; small firms (< 50 employees) added 13,000 jobs in May.

Jobless Claims

The Labor Department reported that initial jobless claims fell 11,000 -- second week of decline -- to 453,000 for the week ended May 29. 

As initials remains stuck above the 450K level, it is tough to have much conviction that the turn in the job market has fresh legs.   One can see payrolls continuing to grow over the next few months, but the claims data is not at all suggesting the increases will be enough to pull the jobless rate significantly lower.  (I’ll note, this morning’s jobs report should show a marked decline in the unemployment rate, but this is only because anywhere from 300K-500K census hirings will overwhelm the people coming back into the workforce.  Alas, a few months down the road these census workers will be looking for work again – the unemployment has yet to peak, but it will dip before it rises again.)

The four-week average of initial jobless claims rose 1,750 to 459,000.

Continuing claims rose 52,000 (+31K for the traditional 26 weeks of benefits and +21K for the emergency extensions that take over after that 26-week period).  This marked the first increase in continuing claims since the week of April 10.  However, the rise is not really meaningful.  The problem for now continues to present itself in the initials data, which shows the pace of net firings is not helpful. 

ISM Service Sector

The Institute for Supply Management reported that their gauge of service-sector activity held at the solid-to-strong level of 55, actually posting the same reading of 55.4 for May, April and March.  Nearly all sub-indices of the report looked good, but the inventory boost looks like it has gotten ahead of demand. 

Those sub-indices:  New orders decelerated just a bit, but remained strong at 57.1 after 58.2 for April; backlog of orders and supplier deliveries either improved or held steady; the inventory change hit the highest level since this survey began in 1997, which means the retail sector has begun to rebuild inventories in earnest – a warning though, the inventory sentiment figure jumped to 60.5 from 53.5, a reading above 50 means respondents believe inventories are too high and this suggests the production to rebuild stockpiles is short-lived; the employment index ticked up to 50.4 from 49.5 (first print in expansion mode in 29 months), although the increase in the reading came from a decline in the number of respondents stating they are reducing payrolls, the number that stated they increased jobs was unchanged.

Chain Store Sales

The International Council of Shopping Centers (ICSC) monthly gauge of same-store retail sales rose 2.6% in May (matching expectations) from the easy comparisons of a year ago – easy comps will remain in play until two more reporting months, once we get to the August figure the comps become more difficult to beat.

All categories save the drugstore component rose in May.  Apparel same-store sales rose 2.0%; department store sales gained 1.6%; luxury goods sales were up 5.0%; discount store sales rose 2.0%; and wholesale clubs ex fuel rose 4.8% from the year-ago period.  Drugstore sales fell 0.7%

Futures

U.S. stock futures have turned down after spending much of the early morning meaningfully higher.  Rumors that a French bank is about to report a large derivatives loss appears to be the drag.  Not helping matters are comments out of Hungary as a spokesman for Prime Minister Orban said that talk of Hungarian default is “not an exaggeration,” according to Bloomberg News.  He went on to say that his economy is in a “very grave situation” because the previous government falsified statistics.  Hungary is not a member of the euro-zone and their economy is not meaningful from a global economic perspective.  But this is just one more indication that European debt problems are more widespread than just a couple of countries. 

Have a great weekend!

Brent Vondera, Senior Analyst